LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

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Second Circuit Agrees to Stay Decision in SEC v. Citigroup

The Second Circuit issued a stay of trial court's decision in SEC v. Citigroup, the case that where the court rejected a $285 million settlement between the SEC and Citigroup.  The appellate court found that the SEC had "shown a likelihood of success", a finding that was not an express decision on the merits.  The opinion is here

Although disclaiming any view on the merits, it is clear from the analysis that Second Circuit will overturn the trial court's decision.  That is no surprise.  The trial court's decision was too broad to be left in tact. 

The surprising part is that in remanding the case (as the Second Circuit surely will do when it addresses the merits), the Second Circuit is likely to significantly constrain the trial court's ability to reject this or any settlement submitted by the SEC.  Thus, for example, in granting the stay, the court emphasized the need to give the SEC's decision to settle considerable deference.   

  • A still more significant problem is that the court does not appear to have given deference to the S.E.C.’s judgment on wholly discretionary matters of policy. The S.E.C.’s decision to settle with Citigroup was driven by considerations of governmental policy as to the public interest. The district court believed it was a bad policy, which disserved the public interest, for the S.E.C. to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies. . . . While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.

The panel went on to note that "there is no indication in the record that the court in fact gave deference to the S.E.C.’s judgment on any of these questions."  As the court reasoned:

  • The S.E.C. believed, for example, that the public interest was served by the defendant’s disgorgement of $285 million, available for compensation of claimants against Citigroup, plus other concessions. The court simply disagreed. In concluding that the settlement was not in the public interest, the court took the view that Citigroup’s penalty was “pocket change” and the S.E.C. got nothing from the settlement but “a quick headline.” Id. at *5.3 In addition, the court does not appear to have considered the agency’s discretionary assessment of its prospects of doing better or worse, or of the optimal allocation of its limited resources. Instead, the district court imposed what it considered to be the best policy to enforce the securities laws. In short, we conclude it is doubtful whether the court gave the obligatory deference to the S.E.C.’s views in deciding that the settlement was not in the public interest.

Thus, courts will need to give considerable deference to the SEC's decision to settle.  While the court still has to rule on the merits, this case nonetheless sends a significant message to trial judges in the Second Circuit (and perhaps in other circuits), that their discretion to overturn SEC settlements is quite constrained.

For more primary materials on this case, go to the DU Corporate Governance web site. 


Facilitating IPOs

In passing the JOBS Act, the House sought to facilitate IPOs.  In fact, there is reason to believe that it does the opposite.  

The legislation seeks to do so by eliminating requirements for companies that have recently become public.  Many of the eliminated requirements (the vote on say on pay) will save little in costs but will remove important protections for shareholders.   

But it got us to thinking about costs.  When Groupon went public in an IPO, it listed the costs associated with the $700 million offering.  The costs included


The following table sets forth all expenses to be paid by the registrant, other than estimated underwriting discounts and commissions, in connection with this offering. All expenses will be borne by the registrant (except any underwriting discounts and commissions). All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the NASDAQ Global Select Market listing fee.

SEC registration fee

$ 87,075

FINRA filing fee

$ 75,500

NASDAQ Global Select Market listing fee

$ 250,000

Printing and engraving

$ 250,000

Legal fees and expenses

$ 2,500,000

Accounting fees and expenses

$ 1,500,000

Transfer agent and registrar fees

$ 10,000

Miscellaneous expenses

$ 1,032,428


$ 5,700,000


The amount is not insignificant but it is less than 1% of the amount raised in the offering.  Does this include all of the expenses?  Actually it does not.  The fourteen underwriters for the deal received $42 million, including $17.4 million paid to Morgan Stanley.

Want to adopt legislation designed to faclitate IPOs?   A focus on reducing the costs incurred in connection with the underwriting process might be a good place to start.  


The "JOBS" Act: Adding Cost and Confusion to the Capital Raising Process

Last week, the House adopted H.R. 3606, THE REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES ACT OF 2011. Despite the emphasis on raising capital, the short title for the legislation is the JOBS Act (‘‘Jumpstart Our Business Startups Act’’), suggesting that the purpose of the legislation is to spur jobs.

The legislation is really a series of laws that were not adequately integrated together.  There will be enormous uncertainty, harmful consequences and added expense that arise out of the inartful drafting.  Lets look at an example.

Section 12(g) of the Exchange Act provides that companies more than 500 shareholders of record and $10 million in assets (see rule 12g-1) must register with the SEC.  Once registered, the company is subject to the periodic reporting requirements, the proxy rules, the tender offer rules and the beneficial ownership reporting obligations (short swing profits) under Section 16. 

Counting the number of shareholders "of record" is, therefore, very important.  As currently used in the securities laws, the phrase essentially coincides with state law.  It counts as a shareholder anyone whose name appears on the list provided to the company by the transfer agent.  See Rule 12g-5 (shareholder of record includes "each person who is identified as the owner of such securities on records of security holders maintained by or on behalf of the issuer").  For the most part, these are the shareholders who have an actual certificate. 

The approach taken by Congress (it was put in place in 1964) has the benefit of simplicity.  Get a list of shareholders from the transfer agent on the last day of your fiscal year, count the number, if its over 500 (and you have more than $10 million in assets) you are subject to Section 12(g).  If less, you are not. 

The "JOBS" Act is about to make a hash out of this simplicity.  The crowdfunding provision provides that anyone purchasing pursuant to the provision will not be treated as an owner "of  record."  See Section 302 ("For purposes of this subsection, securities held by persons who purchase such securities in transactions described under section 4(6) of the Securities Act of 1933 shall not be deemed to be ‘held of record’.’’).

Another provision proposes to increase the number of record ownes from 500 to 1000.  At the same time, however, Section 502 of that provision provides that record ownership does not include "securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration 10 requirements of section 5 of the Securities Act of 1933.’’.

So, if those provisions are adopted, a company must undertake a far more complicated and difficult calculation in determining whether it must register under Section 12(g).  First the company needs to obtain a list of record owners as of the last day of the fiscal year.  Then the company must count the number of record holders but deduct the number who bought under the crowdfunding exemption or pursuant to certain employee benefit plans.  Companies will either need to maintain these records or will need to recreate them, a likely expensive process that requires the company to figure out how the shares were obtained in the first instance.

Moreover, while employees and crowdfunding purchasers are not shareholders of record, the statute is silent about the status of the holders who buy from these persons.  So a company may not be public (500 shareholders of record) while the shares are held by employees/crowdfunding purchasers but may become public when these share are sold.  This may be true even though the actual number of shareholders has not changed.

By tinkering with the record ownership definition (a completely unnecessary thing to do), the legislation adds to the record keeping requirements of all companies, makes the requirements of Section 12(g) more fluid and harder to police, and potentially discourages companies from issuing shares to employees or using the crowdfunding exemption because the shares, once sold, may trigger an obligation to register under Section 12(g).  Shareholders will no longer have any certainty as to when companies will be required to register as a result of the 500 shareholders of record test.   

In other words, it has the potential to discourage capital raising, the opposite of its purpose. 


The JOBS Act and the IPO Off Ramp: Discouraging IPOs

One of the big developments of late has been the rush to pass legislation designed to reform the capital raising process.  The House adopted H.R. 3606, THE REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES ACT OF 2011.  Despite the emphasis on raising capital, the short title for the legislation is the JOBS Act (‘‘Jumpstart Our Business Startups Act’’), suggesting that the purpose of the legislation is to spur jobs.

There is much to be said about this legislation and much to be criticized (certainly of the version that made it through the House).  But we want to point out one thing right off the bat. 

Section 1 creates a class of companies (called emerging growth companies) then promptly exempts them from a grab bag of requirements that include the need for the advisory vote on compensation (say on pay) and certain financial disclosures.  This is the so called "IPO On-Ramp" legislation.  By imposing weaker standards on these companies, it is theoretically designed to encourage IPOs.  In fact, it is likely to have exactly the opposite effect.  

The statute defines emerging growth company as any company with less than $1 billion in gross revenues and allows companies to retain that status until the earliest of:  gross revenues exceeding $1 billion; qualification as a large accelerated filer (issuers with an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more), or the fifth anniversary of the "first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933." 

For companies that remain below the $1 billion mark, they can effectively retain their "emerging growth company" status simply by refusing to do an IPO.  Given the many exemptions from registration (some provided in the JOBS Act), they can continue to raise capital selling shares but not need to engage in a registered offering.  As long as they do not trigger the size/float requirements, they will remain an emerging growth company indefinitely. 

The legislation, therefore, creates a strong incentive for public companies under $1 billion not to engage in a public offering, exactly the opposite of what the legislation is trying to accomplish. 


Belmont v. MB Inv. Partners: Defendants not Liable for Employee’s Ponzi Scheme

In Belmont v. MB Inv. Partners, Inc., 2012 U.S. Dist. LEXIS 1656 (E.D. Pa. Jan. 5, 2012), investors swindled in a Ponzi scheme sought to recover against an assortment of defendants  associated with the money manager that employed the scheme’s perpetrator.  The court, however, granted summary judgment and dismissed the claims. 

This case arose out of a Ponzi scheme allegedly involving North Hills Partnership, L.P. (the “Partnership”), a privately offered investment vehicle controlled by Mark Bloom, (“Bloom”).  Bloom, according to the PPM for the Partnership, was the sole principal of the general partner.  During the period when the scheme occurred, Bloom also served as    a high-ranking money manager at MB Investment Partners (“MB”). 

Bloom ran this scheme independent of his work at MB.  According to plaintiffs, Bloom from July 2001 until February 2009 diverted more than $20 million from the Partnership for his own use.  Bloom also invested Partnership funds with the Philadelphia Alternative Asset Fund (“PAAF”), an entity with which Bloom had a referral agreement.

Bloom did not disclose his conflicts and made the investments in violation of the disclosed strategy for diversification.  When Bloom informed his investors that the PAAF’s funds had been frozen due to fraud, several investors asked for their money back; however, Bloom had already diverted the funds for his own private use.  In order to repay his investors, Bloom solicited additional investments into the Partnership.  Bloom was arrested on February 25, 2009, and pled guilty to numerous charges, including securities fraud, mail fraud, wire fraud, money laundering, and obstruction of tax laws.  MB fired Bloom the day of this arrest.

The plaintiffs sued defendants in an effort to recover some of the funds misappropriated by Bloom.  The defendants included investors in, and employees or directors of, MB.  Plaintiff asserted that they should be responsible for Bloom’s actions with the Partnership and that the defendants failed to adequately supervise Bloom.  The court, however, ultimately rejected these theories.

The plaintiffs’ control person liability claim under Section 20(a) of the Exchange Act of 1934 failed because the plaintiffs failed to show that the defendants culpably participated in Bloom’s fraud.  The plaintiffs argued that the defendants were reckless by failing to implement sufficient internal controls that would have detected Bloom’s fraud.  The court stated that this allegation – even if correct – proved nothing more than simple inaction on the defendants’ part.  Because the plaintiffs failed to offer any evidence showing the defendants actually participated in Bloom’s fraud, the court rejected the plaintiffs’ control person liability claim.

The court also rejected the plaintiffs’ Section 10(b) and Rule 10b-5 claims against MB.  Plaintiffs  argued that Bloom’s fraud, when combined with his high-ranking position at MB, was sufficient to render  MB liable for fraud.  After articulating the elements of claims under Section 10(b) and Rule 10b-5, the court noted that the alleged fraud was committed by the Partnership rather than MB.  Plaintiffs attempt to extend liability to MB rested on “Bloom's role at MB and without regard to whether he was acting in MB's interests or causing harm to MB.” The court found this to be insufficient to justify the claim against MB.  As the court reasoned:  “Plaintiffs have cited no decision extending liability under the federal securities laws to a corporation that had no involvement with the plaintiff harmed.”

The plaintiffs’ claims of negligent supervision, breach of fiduciary duty, and violations of Pennsylvania’s Unfair Trade Practice and Consumer Protection Law all failed because the plaintiffs consistently failed to establish a connection between the defendants and Bloom’s fraud.

The primary materials for this case are available on the DU Corporate Governance website.


A Test Case for Shaming As Sanction?

Commenting on Delaware Chancellor Strine’s El Paso opinion (here) seemed to be obligatory in the bizlaw blogosphere this week, so far be it for me not to follow marching orders.  In case you’ve missed out on the underlying facts, Alison Frankel provides an overview here (HT: Steve Bainbridge).  Among other things, she notes that:

Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs' disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan's $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman's eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used works like "tainted," "furtive," and "troubling" to describe the investment bank's continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal.

However, the Chancellor denied plaintiffs' request for an injunction and suggested it would be nearly impossible for shareholders to hold Goldman accountable.  It is also unlikely that anyone else will have to reach into their own pocket for their “sins.” Again, I quote Frankel from her post linked to above: “I should note that if the deal goes through as expected, Kinder Morgan will likely indemnify El Paso for any payments to shareholders; [El Paso CEO] Foshee is surely covered by D&O insurance, although he could meet resistance from his insurer if he's found to have breached his duty.”  (I reference “sins” as per Bainbridge (here): “Like the minor prophets of old, Delaware judges call out sinners among the rich and powerful and hold them up as examples of what not to do.”).

Thus, much of the focus of the discussion has been on the effectiveness of shaming, since that may well be the only “pain” the primary bad actors in this case experience.  Again, I quote Bainbridge:

[S]ingling out the sinners for opprobrium serves as a sanction and deterrent. This function invokes the controversial question of whether shaming is an appropriate sanction in corporate law. It is an issue on which I have frankly waffled over the years. There are good arguments on both sides and, at least for present purposes, I shall therefore take an agnostic position.

Personally, I think many of those at the top of the corporate food chain simply love the fact that so many of us apparently think that shaming, standing alone, serves any sort of an effective punishment/deterrent role.  As I have blogged previously (here):

I have been unimpressed by the idea of shaming as an effective form of deterrence or punishment ever since I heard the comments of a Big Corp board member effectively affirming what I had long believed to be true:  That at least for the top execs, they'll gladly take your shame all the way to the bank.  They don't live in the same circles as the rest of us and they are about as impacted by our scorn as I would be by the disapproval of my cat …. Ultimately, this is an empirical question.  And I am certainly willing to be convinced that shaming has an effective role to play in the punishment of corporate offenders (both as to the corporate entity and the individuals who run it).  But for now, if more punishment is actually warranted I'd prefer to see more jail time or fines.

I should amend the last part of that quote to read: “fines the wrongdoers have to pay out of their personal assets without any form of indemnification.”

Regardless, perhaps we will get some sort of empirical evidence as this case unfolds.  Frankel writes in a separate post (here):  

Thanks to those [shaming] opinions, plaintiffs' lawyers are much better situated in settlement negotiations than they would have been without expedited discovery and injunction hearings. For the purposes of eventually requesting fees, it's also a lot easier to quantify the benefit you've earned for shareholders through money damages than through an injunction, especially in a single-bidder scenario.

But again, I remain skeptical of shaming as sanction if no individual is reaching into their own pocket to pay for these wrongs. In fact, Robert Teitelman notes (here) that:

Perhaps by now we should begin to understand that reputation might not be what it used to be (particularly in a world where advisory has less clout at large Wall Street firms), or that the real rep Goldman would like to offer to its clients and competitors is that it's smart enough and tough enough to extract every bit of juice from a transaction, because it can.

However, Frankel notes that disgorgement remains a possibility, at least as per a related case ruled on by Vice Chancellor Sam Glasscock (opinion here): “Glasscock was even more explicit about monetary relief in the Delphi ruling than Strine was in El Paso; he said he could simply order Rosenkranz to disgorge the premium he's slated to receive, giving Class A and Class B shareholders the same price per share.”  We shall see.


Presidential Candidates and Sarbanes Oxley

During this presidential cycle, there have been plenty of calls for repeal of Dodd Frank (or significant portions thereof).  Some have also indicated a desire to repeal Sarbanes Oxley.  Newt Gingrich has called for repeal of SOX.  So has, apparently Rick Santorum and Ron Paul

Mitt Romney has supported the repeal of portions of Dodd Frank.  He apparently thinks that SOX should also be repealed.  According to one recent report:

After Mr. Romney vowed to repeal President Barack Obama’s health care overhaul and the Dodd-Frank financial regulation law, a voter in the crowd asked whether his list of repeals would include Sarbanes-Oxley, as well.  “Yes,” Mr. Romney said. “People who have spent their life in Washington in many cases … don’t understand that when they write a piece of legislation what kind of impact that’s going to have in the private sector, how many people’s lives will be affected by it.”

An off the cuff answer to a single question doesn't necessarily provide complete information about the candidate's views.  While some sections of the Act are controversial (section 404(b) for example), others, for the most part are not (the mandatory separation of auditing and non-auditing functions).  Moreover, Romney's web site is a bit more nuanced on the issue (calling for amendments "to relieve mid-size companies from onerous requirements"). 

Its possible, therefore, that the candidate has a more complex view on SOX than could have been articulated in a rapid question and answer format.  Nonetheless, with Congress increasingly involved in this area, one can hope that this will encourage public debate over the corporate governance provisions in SOX and Dodd Frank and their role in promoting investor protection.   


Lawrence v. Bank of America: Allegations of Actual Knowledge of Ponzi Scheme Fall Short

In Lawrence v. Bank of America, D.C. Docket No. 8:09-cv-02162-VMC-TGW, 2012 LEXIS 777 (11th Cir. Jan. 11, 2012), putative class action plaintiffs alleged “(1) common law fraud; (2) conversion; and (3) breach of fiduciary duty” against Bank of America (“BOA”). These causes of action stemmed from allegations that BOA was aware of, and “substantially assisted in,” a Ponzi scheme by one of its account holders.  The Eleventh Circuit Court of Appeals affirmed the district court’s holding to dismiss the initial complaint and denied the plaintiffs leave to amend their complaint.

Through his company, Diamond Ventures LLC, Beau Diamond (“Diamond”) allegedly engaged in a Ponzi scheme and deposited millions of dollars from investors into an account at BOA. By upgrading the account to the Premier Banking Division which could “provide daily updates on major deposits and wire transfers,” the plaintiffs alleged BOA should have been on alert that only $15,400,000 of the $37,600,000 deposited was invested in foreign exchange companies. Additionally, Diamond described his business to BOA as an “investment club,” even though BOA prohibited such “clubs.”

Under the federal securities laws, there is no cause of action for aiding and abetting violations of the antifraud provisions. See Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In order to survive a motion to dismiss for aiding and abetting under state law, a plaintiff must show “(1) an underlying violation on the part of the primary wrongdoer; (2) knowledge of the underlying violation by the alleged aider and abetter; and (3) the rendering of substantial assistance in committing the wrongdoing by the alleged aider and abettor.”

The court held that the plaintiffs’ allegations were too weak to infer that it was plausible the bank had “actual knowledge” of the scheme, in spite of the alleged “atypical” transactions. Even though BOA authorized numerous large transactions by Diamond, it was not required to “investigate” them under Florida law.

The plaintiffs attempted to strengthen the inference of actual knowledge by showing that a BOA representative advised another bank customer that Diamond’s clients were “happy with their investment,” and consequently, that customer transferred money to Diamond Ventures. The court found that this “amendment would have been futile” because the positive comments do not “necessarily establish [BOA’s] participation in a Ponzi scheme.”

The primary materials for this case may be found on the DU Corporate Governance website.


Citizens United and the SEC (Part 3)

So what might happen if the SEC doesn't propose rules requiring disclosure of political contributions? 

Efforts are afoot in Congress to provide a legislative solution.  Congressman Van Hollen recently reintroduced the DISCLOSE 2012 Act. This is legislation that would impose a variety of disclosure requirements on corporations in connection with campaign contributions.   

Most of the proposed legislation deals with mandatory reports to the Federal Election Commission.  Tucked away inside, however, is a proposed amendment to the Federal Election Campaign Act that would add a mandatory disclosure requirement aimed at shareholders.  While the provision also applies to non-profits and their donors, the title of the proposed section identifies its primary intent:  "Shareholders' Right to Know."  

The provision applies to a "covered organization which submits regular, periodic reports to its shareholders, members, or donors on its finances or activities".  Because a covered organization includes a corporation, this language would presumably apply to any public company that distributes proxy materials to shareholders. 

The language, however, could be much broader and apply to non-public companies that routinely distribute financial materials to shareholders.  Companies may do so because of state law requirements (perhaps to conform with the duty of complete honesty), contractual obligations, and on a voluntary basis in order to keep shareholders informed.

The proposed legislation provides that the information distributed to shareholders must include "in a clear and conspicuous manner, the information included in the statements filed by the organization under section 324 with respect to the campaign-related disbursements made by the organization during the period covered by the report."  The proposed requirement also mandates that companies maintaining a web site include a link to the disclosure at the FEC web site.  The link must go up within 24 hours of posting at the FEC site and remain in place at least one year from the date of the relevant election.  

The provision requires disclosure to shareholders.  Yet the agency with more than 70 years of experience crafting shareholder disclosure -- the SEC -- is nowhere mentioned in the legislation. To the extent there is a need for implementing regulations, therefore, the task presumably falls to the FEC.  An agency with no experience in shareholder disclosure owuld become primarily responsible for shareholder disclosure. 

The approach also opens the door for conflicting regulation.  Nothing in the legislation changes the SEC's general authority to regulate the content of a proxy statement.  Thus, whatever disclosure the FEC imposes, the SEC could add to it.  Moreover, even if the SEC did not impose additional requirements, the antifraud provisions would still be available for actions against companies in the event of incomplete disclosure.  Thus, the SEC (and private parties) could bring actions against companies conforming to the FEC disclosure requirements where the disclosure was viewed as materially incomplete.     

In short, companies confront the risk of disclosure regulation by a second agency not necessarily equipped for the task.  They confront the risk of conflicting regulatory regimes.  And the SEC confronts the possibility that the proxy disclosure requirements will need to be shared with another agency.  

None of this sounds particularly appealing.  Can this be headed off?  Presumably if the SEC acts, there will either be less reason (or no reason) for legislation designed to regulate disclosure to shareholders.  Moreover, the requirements will be ensconced in regulations rather than statutes, providing greater flexibility in crafting the standards.   Finally, it will leave corporate disclosure where it belongs, with the SEC.  

Of course, the concern over congressional intervention is only as serious as the likelihood the legislation will be adopted.  It has 117 co-sponsors.  Nevertheless, Congress is very divided these days and likely to remain without a consensus on this issue, at least through the November elections.  But after that, all bets are off.  Pressure for reform will likely continue to build.  Moreover, serious abuse or scandal may cause Congress to act with unscheduled alacrity.  Recall that Sarbanes Oxley was moribund until the collapse of Worldcom.  Campaign finance disclosure could easily undergo a similar reincarnation. 

The Commission needs to take control of this issue and not cede away such an important disclosure issue to another agency.  For that to occur, the Commission will need to move forward with rulemaking in this area. 


Citizens United and the Political Process

While all eyes focused yesterday on the Republican primaries/caucuses taking place on Super Tuesday, some Democrats also caucused. 

Caucuses were held, for example, in Colorado.  For those in Denver, copies of the platform for the Democratic Party of Denver was distributed (a copy is here).  One of the planks in the Platform provided: "We believe that corporations are not persons and should not be treated as persons under the law and support legislation to reverse the effects of the Citizens United case."

It has to be a relatively rare circumstance where a local party platform specifically references a Supreme Court opinion and takes issue with something as esoteric as the status of corporations.  Nonetheless, it is evidence of the deep feelings stirred by the opinion and perhaps another indication that the issue will eventually generate a legislative change.  


Citizens United and the SEC (Part 2)

We are discussing the SEC's role in requiring disclosure of political expenditures.  The issue was recently addressed by  Commissioner Aguilar at SEC Speaks in February.  SEC Speaks is a special forum.  It's an annual conference about the SEC.  Because the conference takes place in Washington, most or all of the commissioners typically speak.  Moreover, the broad based nature of the conference and the emphasis on the SEC effectively provide commissioners with a broad range of choice in selecting an appropriate topic. 

And in fact, the talks spanned the gamut.  The Chair gave a "state of the SEC" address, reviewing a number of changes and initiatives that have taken place at the Agency.  Commissioner Walter essentially did a retrospective on her long tenure at the Commission (as a staff member and as a commissioner). Commissioner Gallegher spoke about liability for the failure to supervise by compliance and legal personnel at broker dealers and investment advisors.  Commissioner Paredes discussed the Volker Rule. 

Commissioner Aguilar's talk wasn't about the merits of political contributions by corporations but about the need to protect shareholders and investors by ensuring adequate disclosure.  The existing disclosure regime, he reasoned, often left shareholders "in the dark as to whether the companies they own, or contemplate owning, are making political expenditures." Without adequate disclosure, shareholders and investors could not "can make informed decisions about whether to purchase, hold, or sell shares – and how to exercise their voting rights."

He noted the calls on the Agency to initiate rulemaking on the issues.  A group of law professors submitted a rulemaking petition.  So has 21 civic organizations.  In addition: 

The Commission has also received letters from Members of Congress, from elected government officials with fiduciary responsibility for nearly one trillion dollars in pension fund assets, and from a coalition of United States Senators. Each of these letters asked the Commission to take action to require public disclosure of corporate political spending.

The staff has taken some steps in the direction of disclosure by refusing to allow for the exclusion of shareholder proposals addressing campaign contributions.  They have become popular.  According to Commissioner Aguilar:  

in 2011, out of the 465 shareholder proposals appearing on public company proxy statements, 50 proposals were related to political spending.  In fact, more proposals of this type were included in proxy statements than any other type of proposal.  During the 2011 proxy season, 25 of the companies in the S&P 100 included proposals on their proxy statements requesting disclosure of corporate spending on politics. 

For the most part, however, these proposals are precatory and, as a result, need not be followed even if adopted.   

The Commission could be actively pursuing rulemaking efforts in this area, with the efforts still nonpublic.  The speech from Commissioner Aguilar, however, suggested that the development of disclosure standards was not an area of priority.  He called on the Commission the "act swiftly to rectify the situation by requiring transparency."

Any lack of priority may have a number of understandable explanations.  For one thing, the Agency is busy with the burdens of Dodd-Frank.  Political disclosure is not mandated and, as a result, operates under no required time frame.

Another possibility is that the SEC is hesitant to enter a thicket that will almost certainly result in serious attack, no matter what position it takes (the pactice of unprecedented criticism mentioned by Commissioner Walter described in her talk at SEC Speaks).  Indeed, if even settlement in the Goldman case can generate criticism (over whether it involved coordination with the Administration), there is little doubt that something as volatile as political contributions will produce the same result. 

But having said that, there is a potentially serious draw back to any inactivity by the Commission.  It may well lose control over the issue and see corporate disclosure regulated by yet another agency.  We will address that in the next post. 



Citizens United and the SEC (Part 1)

Whatever one thinks of Citizens United and the opinion by Justice Kennedy, the impact seems ubiquitous.  Super pacs are everywhere and corporate money seems to be sloshing through the system.

Even some on the Supreme Court are concerned.  In a statement appended to the decision to stay the Montana Supreme Court, Justices Ginsburg and Bryer all but asked for an appropriate cert petition to permit reconsideration of the decision.  As they noted:

Montana’s experience, and experience elsewhere since this Court’s decision in Citizens United v. Federal Election Comm’n, 558 U. S. ___ (2010), make it exceedingly difficult to maintain that independent expenditures by corporations "do not give rise to corruption or the appearance of corruption." Id., at ___ (slip op., at 42). A petition for certiorari will give the Court an opportunity to consider whether, in light of the huge sums currently deployed to buy candidates’ allegiance, Citizens United should continue to hold sway. 

It wasn't supposed to be this way.  Justice Kennedy saw a solution:  Corporate governance.  As he reasoned in Citizens United:   

Shareholder objections raised through the procedures of corporate democracy, . . . can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. . . . With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens withthe information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’spolitical speech advances the corporation’s interest inmaking profits, and citizens can see whether elected officials are "‘in the pocket’ of so-called moneyed interests." . . . The First Amendment protects political speech;and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.  

In effect, for Justice Kennedy, disclosure was enough.  With disclosure, shareholders could determine whether contributions are profit maximizing behavior and, if not, could hold management "accountable".  

We have already discussed the fallacy of this approach.  It reflects a lack of understanding of the governance process, particularly the limits imposed under state law on shareholder authority.  But whatever the weaknesses, the approach presupposes that political contributions will be subject to clear disclosure requirements. 

Disclosure is for the most past the responsibility of the SEC.  Moreover, disclosure is the principle mechanism behind private ordering.  The market is informed and companies can respond in the most efficient way. That is not to say that all disclosure is a good thing.  Disclosure burdens can become excessive.  This has been a particular concern with respect to proxy disclosure.  

SEC intervention in this area, however, does not seem to fit the "excessive disclosure" concern.  Rather than merely add complexity, the information is something shareholders seem to want.  More importantly, inaction may result in significant administrative consequences. 

Congress has proposed legislation that could preempt the area.  The legislation would require companies to report political contributions to the the Federal Election Commission (FEC).  In addition, however, the legislation would require disclosure to shareholders.  Only the DISCLOSURE 2012 ACT leaves execution of these requirements to the FEC, not the SEC.  In other words, congressional intervention would oust the SEC for the disclosure process.   

SEC rulemaking efforts in this area might head off the legislation.  So is the SEC moving forward in this area?  We will discuss this in the next post. 



"Spending Time with Family" and the Antifraud Provisions

It is a time honored practice to explain a CEO's resignation as motivated by family concerns.  It might be to spend more time with family or something a bit more generic (family reasons, which presumably could, for example, include such things as repairing relations with a spouse). 

When the CEO of Pfizer resigned in 2010, the press release indicated he wanted to “recharge my batteries, spend some rare time with my family and prepare for the next challenge in my career.”  The departing CEO of Restuarant.com likewise wanted to spend time with family.  So did Dick Notebart when he stepped down as CEO of Qwest.  The same was true at Red Roof Inn and Kellogg

With respect to the recent resignation of the CEO at Stryker, the press release indicated that he resigned "for family reasons".  According to the WSJ

The 48-year-old executive resigned Feb. 8 after apparently losing the confidence of some key board members at the medical-device maker, according to a person familiar with the matter.  Those board members became bothered after learning of [the CEO's] purported affair while he was involved in divorce proceedings, this person said. The divorce isn't final, according to Michigan court documents. The alleged affair couldn't be independently confirmed.

We have no idea whether any of this is true.  Nor do we know whether the resignation was prompted by anything other than family reasons.  Indeed, romantic involvement with a former employee by a CEO going through a divorce, to the extent it even occurred, doesn't seem to raise the types of concerns that typically result in a CEO being pressured to leave. 

Nonetheless, it got us thinking about whether a company could be successfully sued under the antifraud provisions (the infamous Rule 10b-5) when using the "family" explanation for a CEO's departure.  The practice may be widespread.  As the WSJ noted:

Boards force out a CEO over what they consider unethical behavior more often than commonly believed but rarely divulge that's the reason, according to experts. Many directors want their leader to live by high standards, and will replace the CEO if they believe he or she "has shown bad judgment in personal life,'' a succession-planning specialist said.

We start with the assumption that the motivation is true.  Officers commonly depart for family reasons.  So the issue under the antifraud provisions is not whether the family explanation is false but whether, having disclosed one motivation, the company is required to reveal any other significant motivation for the departure. 

This arises from the obligation under the antifraud provisions to ensure that all statements to the market are accurate and complete, an obligation that, by the way, also arises under state law.  See Sherwood v. Ngon, 2011 Del. Ch. LEXIS 202 (Del. Ch. Dec, 11, 2011) (statement may have been misleading by implying that motivation given for removing director " was the only reason that motivated the board to remove him from the Company's slate.").  

Resolution of the disclosure issue for the most part depends upon the materiality of any omitted motivations.    Materiality, in turn, depends upon the context. 

In many cases, there is an argument that omitted motivations won't be material either because they are unimportant to reasonable investors or because the market already knows the truth.  Thus, shareholders in a company where earnings or stock prices have performed poorly will know that these were factors likely played a role in the resignation, even if they were unstated. See Zahid Iqbal & Dan French, Executive share ownership, trading behavior, and corporate control, 59 J. of Economics and Business 298, 299 (2007) (noting that while companies often attribute executive departure to "early retirement" or "personal reasons," at least one study  concluded that "whatever the reason stated [for an executive's departure], the majority of executive turnover during financial distress is associated with the financial condition of the company."). 

Moreover, in those circumstances, share prices sometimes actually go up.  Shareholders do not care about the reason for the departure, only that the departure occurred.  In other cases, the departure of the CEO may matter but the reasons do not. 

Motivations that have the strongest chance of crossing the materiality threshold are those that reflect not so much on the CEO but on the company.  Thus, for example, a "resignation" of a CEO as part of an interenal investigation into financial fraud or a departure arising out of criminal investigation of the company may well be material.  These motivations suggest problems inside the company that shareholders and investors would want to know about. 

What about allegations of unethical behavior?  For one thing, that concept is extremely broad with no automatic content.  Moreover, context clearly matters.  Ethical issues in the context of a CEO who remains at the helm may be very material (and therefore subject to disclosure).  Investors would want to know about the unethical behavior in assessing their trust in management when buying shares.  Shareholders would presumably weight the factor when voting for directors. 

In the context of a CEO's resignation, however, departures as a result of "ethical" concerns would generally seem to add little to the total mix.  The trust issue is not particularly important since the CEO is departing.  Materiality might be a concern if the CEO's behavior somehow results in substantial exposure to the company (say the loss of all government contracts).  But this would likely not be the case in most instances.  

Returning to the Stryker situation, the company disclosed that the CEO departed for "family reasons."  The share prices hardly changed.  When the WSJ published an article hinting at other possible motivations, the share prices again hardly changed.  Perhaps the market did not believe the hints.  Or, perhaps the market didn't care.  In other words, perhaps the motivations for the resignation were not material. 

The materiality of omitted motivations in the context of a resigning CEO will depend on each specific set of circumstances.  Nonetheless, as a general rule, it will often be a difficulty case to maintain. 


SEC v. Huff: Disgorgement Amount in Civil Enforcement Suit does not have to be Exact

On January 3, 2012, the 11th Circuit Court of Appeals in SEC v. Huff, No. 11-10758 (11th Cir. Jan. 3, 2012) affirmed the trial court’s decision to order the defendant to disgorged all of the profits associated with the fraudulent scheme.   

The Securities and Exchange Commission (“SEC”) filed a civil enforcement action against Anthony Huff (“Huff”) for allegedly diverting millions of dollars from Certified Services, Inc. (“Certified”) to another company, Midwest Merger Management, LLC.  The district court held Huff liable for five counts of securities law violations and ordered Huff to disgorge over $10 million plus interest.  SEC v. Huff, No. 08-60315-CIV-ROSENBAUM (S.D. Fla.).  Huff appealed the decision, claiming that the trial court’s liability determination and disgorgement amount were based on insufficient evidence and constituted an abuse of discretion.

In a per curiam opinion, the 11th Circuit held that the trial court did not abuse its discretion in ordering the multimillion dollar disgorgement.  More specifically, the court explained that the defendant had failed to meet “his heavy burden” of showing that the trial court had erred in finding that he fit the requirements of a “controlling person” under section 20(a) of the Securities Exchange Act.  15 U.S.C. § 78t(a).   The finding that Huff reviewed and approved the misleading SEC filings was considered “wholly plausible” and the court held that the lower court did not err in finding that Huff in fact “had the requisite power to directly or indirectly control or influence the specific corporate policy” which led to the fraudulent conduct.
Huff also appealed the trial court’s calculation of $10.017 million plus interest as an appropriate amount of money for disgorgement.  He claimed that the trial court’s amount was not exact.  A court, however, is not required to be precise in its approximation.  SEC v. ETS Payphones, Inc., 408 F.3d 727, 735 (11th Cir. 2005) (stating that the SEC’s burden for showing the amount subject to disgorgement is “light”).  In addition, the 11th Circuit held that the trial court did not abuse its “broad discretion” in ordering disgorgement of “the profits associated with the fraudulent scheme” based upon the “pervasive” nature of the fraud.  As a result, the 11th Circuit upheld the trial court’s holding that Huff should pay over $10 million plus interest for his securities law violations.

The primary materials for this case may be found on the DU Corporate Governance website.


“NIMBY” Austerity

In poker, when a good player catches an opponent trying to bluff, the explanation often includes: “The story he was trying to tell me just didn’t make any sense.”  In other words, the hand the bluffer was attempting to represent didn’t fit the actions he took leading up to the bluff.  I thought of this when I read in the Wall Street Journal (here) that:

European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent's traditional social contract is obsolete. 

The reason I thought of the bluffer telling an unconvincing story when I read this was because for many people in the world, the story leading up to this statement goes as follows:

(1) We get pushed to the brink of the worst global financial crisis since the Great Depression of 1929 by a combination of fat cats taking excessive risks and complicit regulators refusing to oversee critical areas of the market while implicitly guaranteeing the fat cats’ losses. 

(2)  Somewhere on the way to holding the wrongdoers accountable, the script gets flipped and we are told the crisis is actually one of unsustainable safety nets.  In perhaps the greatest twist in the story, those telling us that the crisis is now about over-spending also tell us that de-regulation is now a key component of the cure. 

(3)  Finally, the fat cats and their cronies in government tell the blue collar workers of the world that in order for crisis to be averted the blue collar workers must all tighten their belts.  The fat cats and their cronies then get into their chauffeured limos and drive off to their gated communities to count the profits that their recently bailed out firms are generating.

Obviously, it would be hard for me to tell this story in a more lopsided way, but my point is not that the failure to regulate swaps, or the repeal of Glass-Steagal, is more to blame for our current difficulties than overspending.   Nor am I trying to argue that imposing austerity measures on the middle class is an ineffective response.  What I am trying to say is that perceptions matter, and that I fear that the perception of a large portion of the global population is that they are being told a story designed to bluff them into giving up a lot, while those doing the asking don’t appear to be giving up much at all.  (For example, go here to read why Michael Moore thinks "America Is Not Broke.")  

This is what I mean by NIMBY (not-in-my-back-yard) austerity, and this is a problem because it goes to legitimacy.  When the people don’t believe their government has any legitimate basis for asking them to sacrifice, the response often comes in the form of riots like we are seeing in Greece.  What the leaders of the world that are calling for austerity need to do is create a sense of shared sacrifice.  I’m not sure how they best go about doing that, but I’m pretty sure it doesn’t include seeking sympathy for how tough it is to juggle a household staff, second home, and $50,000 vacation on a short bonus.


SEC v. Weintraub: Businessman Liable for Multi-Billion Dollar Tender Offers

In SEC v. Weintraub, No. 11-21549-CIV-HUCK/BANDSTRA (S.D. Fla. Dec. 30, 2011), the court granted the U.S. Securities and Exchange Commission’s (“SEC”) motion for summary judgment against defendants Allen E. Weintraub and AWMS Acquisition, Inc., for violating Securities and Exchange Act sections 10(b) and 14(e) and SEC rules 10b-5 and 14e-8.

According to the SEC, Weintraub is the sole owner and director of AWMS Acquisition, Inc., d/b/a Sterling Global Holdings (“Sterling Global”).  On March 19, 2011, Weintraub sent a letter to Eastman Kodak Company (“Kodak”) that offered to purchase all of the company’s outstanding stock at a 46 percent premium for $1.3 billion.  Ten days later, Weintraub sent a similar letter to American Airlines’ parent company AMR Corporation (“AMR”), offering to purchase all of the company’s outstanding stock at a 48 percent premium for $3.25 billion.  Neither Kodak nor AMR responded to Weintraub’s letters.  Weintraub also contacted several reporters and media outlets, falsely informing them that Sterling Global was in “discussions” with Kodak and that “several large institutions” were backing him in the deal with AMR.

The SEC alleged that, despite Weintraub’s representation that he had received financing from banks to engage in these transactions, he in fact had received no financial backing from any of the three banks he approached.  Weintraub failed to disclose to Kodak, AMR, these companies’ shareholders, and the press that he pled guilty to money laundering and organized fraud in 2008, he was currently on probation, the United States District Court for the Southern District of Florida “permanently enjoined him from acting as an officer or director of any public company as a result of a previous violation of federal securities law” in 2002, he currently owed a judgment of $1,050,000 to the court, he filed for bankruptcy in 2007, and that Sterling Global was dissolved in 2010.

Section 10(b) and rule 10b-5 require that plaintiffs prove a material misrepresentation or omission, a connection between the misrepresentation or omission and purchase or sale of a security, and scienter.  Whereas ordinary plaintiffs must also prove reliance, causation, and economic loss, the SEC has a lower standard and is only required to show the first three elements.

The court held that the first element of the section 10(b) and rule 10b-5 claim was met, because Weintraub repeatedly made misrepresentations and omissions concerning “(1) his and Sterling Global’s ability and intention to consummate the deals with Kodak and AMR, (2) his personal background, (3) his ownership of stock in AMR, and (4) his representations to media outlets.”  Not only did Weintraub and Sterling Global lack the financial ability to purchase these companies’ outstanding stock, Weintraub consciously withheld material information regarding the prior dissolution of his company and his inability to act as an officer or director for the company, among several other items.

A false statement or omission is material when “there is a substantial likelihood that a reasonable investor would have believed the false or misleading statement or omission was important in deciding whether to purchase, sell, or hold securities.”  Weintraub’s statements to the two companies, their shareholders, and the press about his purported tender offers “gave the impression that [they] were serious and could be relied upon by investors”; thus, the court determined they were material.

The court held that the second and third elements of section 10(b) and rule 10b-5 were met because an offer to purchase a company’s outstanding stock is “in connection with” the purchase or sale of a security, and because Weintraub clearly intended to deceive the public when he sent offer letters after failing to acquire financing. 

The SEC also successfully proved Weintraub’s violations of section 14(e) and rule 14e-8.  Section 14(e) states that “[i]t shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact…in connection with any tender offer….”  The court held that Weintraub unmistakably made material misrepresentations and omissions regarding his purported tender offers and personal background. 

The primary materials for this case may be found at the DU Corporate Governance website.


The SEC and Small Capital Formation: The Bad Girl Provisions (Part 4)

Bad actor provisions are often described as "bad boy" provisions.  See Securities Act Release No. 9211 (May 25, 2011) (noting that bad actor provisions are "sometimes called 'bad boy' provisions").  This is another hallowed and ancient term in the lexicon of securities lawyers.  The term has been around at least since 1982. 

Nonetheless, times change and so do terms.  We note this exchange in a recent roundtable on small business capital formation:

MR. BERKELEY:The only other point that I would make is that the bad boy -- excuse me, bad person -- provisions --

MS. CROSS: Bad actor.

MR. BERKELEY: Bad actor provisions -- that's --politically correct is bad. Bad persons is not politically correct.

MS. CROSS: Bad actor.

MR. BERKELEY: Okay, sorry. My apologies to all concerned. It's only been bad boys since 1982 or thereabouts, but you know -

Politically correct or not, one suspects that the term "bad boy" is simply wrong.  There are no doubt plenty of women who are bad actors and are, therefore, disqualified from using the relevant exemptions.  Time to give women their due and jettison the term "bad boy" from the securities lexicon.


The SEC and Small Capital Formation: Strengthening the Bad Actor Provisions (Part 3)

The recently formed Advisory Committee on Small and Emerging Companies has recently recommended that the SEC relax the general solicitation requirement for offerings under Rule 506.  We have been discussing the connection between any relaxation and the SEC's proposal to extend bad actor disqualifications to offerings under Rule 506.

While expansion of the use of general solicitations can benefit legitimate companies raising capital, extension of the bad actor provisions to Rule 506 seeks to ensure that this expanded authority will not be used by recidivists. 

To the extent that these reforms can be read in conjunction, it suggests that considerable thought needs to be given to the appropriate type of bad actor provisions.  These provisions generally disqualify issuers, brokers, promoters, and certain large shareholders from relying on the relevant exemption (only Regulation A and Rule 505 contain bad actor provisions) to the extent having engaged in the specified disqualifying conduct. 

Several observations about this approach deserve comment.  First, the Commission has proposed an extension of the bad actor provisions to Rule 506.  The SEC has asked for comments on whether the bad actor provisions should be extended to Rule 504, the seed capital rule.  The answer is that they should for the reasons specified here:   Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions.  Under certain circumstances, Rule 504 allows for the use of general solicitations.  Extending the bad actor provisions to the rule would effecitvely prohibit recidivists from using general solicitations while preserving the right for legitimate companies.

Second, the category of bad actors should be expanded.  Violations of the registration requirements sometimes involve active participation by transfer agents and lawyers.  This occurs because exempt securities typically contain a legend on the certificate restricting resale.  Often, fraudulent offerings involve the improper removal of the restriction.  The legend is lifted by the transfer agent typically after receiving an opinion of counsel.

Transfer agents and lawyers should, therefore, be included in the type of persons who can render an exemption inapplicable.  For both, however, this should only occur where they are found, in effect, to be active and knowing participants in a registration violation.  This is discussed in greater detail here:  Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions.

Strong bad actor provisions will help insure that any relaxation in the ban on general solicitations is accompanied by requirements designed to prevent improper use of this authority.  In short, bad actor provisions target bad actors without interfering with the ability of legitimate companies to raise capital. 


The SEC and Small Capital Formation: General Solicitations and Private Placements (Part 2)

Small capital formation is an important area that requires constant reexamination.  After all, the central system for regulating capital raising was put in place in the Securities Act of 1933, long before the invention of cell phones, email blasts and the Internet.  Technology alone, therefore, necessitates constant reexamination.  

The committee has been relatively active, having met three times so far:  Oct. 2011, Jan. 2012 and Feb. 2012.  The Committee has looked at a number of tough issues, including crowdfunding.  The Committee has, so far, issued one recommendation.  The recommendation relates to the relaxation of the general solicitation requirement for private placements.  The recommendation provides that:

the Commission take immediate action to relax or modify the restrictions on general solicitation and general advertising to permit general solicitation and general advertising in private offerings of securities under Rule 506 where securities are sold only to accredited investors.

General solicitations are, in general, prohibited under Regulation D.  The big exception is in Rule 504, the seed capital exemption.  General solicitations can be made under the rule if the offering meets certain requirements under state law.  17 CFR 230.504. 

General solicitations facilitate capital raising by allowing companies to mass market an exempt offering, thereby locating the largest number of potential investors in a cost effective way.  The tension in the area, however, is that the same mass marketing techniques can also facilitate fraudulent offerings.  Who hasn't received an email suggesting great things about a penny stock.  Similarly, pump and dumps generally require some type of general solicitation to succeed.  For more on this, see Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions.   

One way to take this tension into account is to allow for general solicitations in some cases but take other steps designed to minimize the possibility that the exemption will be used for improper purposes.  The SEC has a rule proposal outstanding that would do that by extending bad actor disqualifications to offerings under Rule 506.  See Securities Act Release No. 9211 (May 25, 2011).  To the extent these proposals are adopted (something more or less mandated by Dodd-Frank), any relaxation in the general solicitation requirements under Rule 506 will be done in conjunction with restrictions on the use of the authority by recidivists and other bad actors.

Thus under this model general solicitations will facilitate capital raising by legitimate companies while bad actor provisions will ensure that recidivists who violate the rule will be prohibited from using it.  We will discuss a few of the implications of this approach in the next post.

For more on this topic, see Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions.     


Has Anything Changed Since Citizens United to Revive the Anti-Corruption Rationale?

Yahoo reports that the Supreme Court has blocked a Montana Supreme Court ruling that upheld a state ban on corporate political independent expenditures.  The ruling appears to be in direct conflict with Citizens United, though the Montana Supreme Court did seek to distinguish its ruling on the basis of Montana’s unique experience with corruption.  See Western Tradition Partnership, Inc. v. Attorney General, 363 Mont. 220, [ ] (2011) (“unlike Citizens United, this case concerns Montana law, Montana elections and it arises from Montana history”); id. at  [ ] (“The question then, is when in the last 99 years did Montana lose the power or interest sufficient to support the statute, if it ever did.”).  You can find the full text of the Montana opinion here.

Interestingly, a quote from Justice Ginsburg in the Yahoo article, on behalf of herself and Justice Breyer, raises the question of whether the reality of post-Citizens United corporate spending on elections might change the Court’s conclusion as to the absence of any corruption concern vis-à-vis corporate independent expenditures:

Justice Ruth Bader Ginsburg, a dissenter in Citizens United, issued a brief statement for herself and Justice Stephen Breyer saying that campaign spending since the decision makes "it exceedingly difficult to maintain that independent expenditures by corporations 'do not give rise to corruption or the appearance of corruption.'"

To see for yourself whether there is any room for revisiting the rejection of the anti-corruption rationale in Citizens United, you might want to go back to that opinion (which you can find here) and (re-)read pages 40-45, which contain the bulk of the majority’s discussion of that point.  In particular, I’d ask you to consider what you think of the “evidence” the majority presents to support its conclusion that “independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.”  Specifically, ask yourself whether that evidence is sufficient to take that determination out of the hands of Congress.  Finally, ask yourself what you think of the majority’s further conclusion that: “The appearance of influence or access, furthermore, will not cause the electorate to lose faith in our democracy.”  Before answering that question, you might want to read some of the comments that follow the Yahoo article.